consolidate or wait for forgiveness

Should I consolidate or wait for Public Service Loan Forgiveness?

Michael Lux Blog, Consolidation, Student Loans 0 Comments

Many young professionals face the same difficult question.  Should I be aggressively paying off my student loans, or is it better to take advantage of the federal student loan forgiveness programs, such as Public Service Loan Forgiveness.  Answering this question is so difficult because of the many variables that go into the equation.

The stakes are especially high for those individuals with large federal debts, but also with a good salary.  Rather than just generally discussing the topic, we will go through the math as it pertains to a young medical professional who recently emailed us.

“Jenny” wrote to us with questions about her pharmacy school debt.  She graciously allowed us to print her full email:


I am very glad that I just found your website! I am on the verge of consolidating my student loans and I think you may have just saved me. A little about me.. I have both private and federal loans, with loan consolidation applications currently pending with SoFi and DRB (I have yet to hear from DRB and it has almost been a month). I was planning on consolidating my private and federal loans together, as I was told that I do not qualify for the public service loan forgiveness through the government (my debt to income ratio was too high?). This has puzzled me, as I have a colleague (I am a pharmacist) who has qualified for the public service loan forgiveness (I’m sure we have a similar debt to income ratio). I am afraid there is something that I am missing, if my colleague qualifies and I do not. And now that I know the golden rule of loan consolidation, I certainly do not want to make that mistake! I would appreciate any and all advice on the matter.

Private loan is approx 28k at a variable interest rate (currently 6.8%??) – 10 years left
Multiple federal loans totaling approx 88k with fixed interest rates ranging from 4.5-6.8% – 10 years left
Income is just over 6 figures

Your website now has me reconsidering my choice to consolidate all of my loans with one of the two companies mentioned above. My original plan was to refinance the private loan to a fixed rate loan, and apply for the public service forgiveness plan. However, now that I was told I do not qualify, I am at a loss. Am I the 1% that should consolidate my private and federal loans? Should I simply refinance my private loan into a fixed loan and consolidate my multiple federal loans through the government? Please help! Your advice would be greatly appreciated!!

About qualifying for forgiveness

The full details on pubic service forgiveness can be complicated, but put simply, if you work for a public interest employer and enroll in an eligible repayment plan, you can get your loans forgiven after 10 years.  The eligible repayment pans are the Income-Driven Plans (including Income-Based Repayment and Pay As You Earn) and the Standard 10-year repayment plan.  If you are on the 10-years plan for the entire time, your loan will be paid in full by th time you qualify, so the program only really benefits people who qualify for an income-driven plan.

By far the two most popular Income-Driven plans are IBR (Income-Based Repayment) and PAYE (Pay As You Earn).  Under IBR you are expected to pay 15% of your discretionary income towards your federal student loans and under PAYE, that number drops to 10%.  (The plan you can sign up for depends upon when you took out your first student loan).  For the purposes of answering Jenny’s question, we will assume she qualifies for PAYE.  Even if she doesn’t presently, she will probably be able to sign up for REPAYE when it goes into effect later this year.  Like PAYE, REPAYE will also require the 10% of your discretionary income.

For the purposes of making the math easier, we will assume that Jenny’s discretionary income is $100,000.  We know she makes slightly over this amount, and depending upon family size, it should be a pretty accurate number.

Further Reading: How is my discretionary income calculated?

Based upon that assumption, her monthly payment under PAYE would be approximately $833 per month.  (we get this number by taking $100,000 dividing it by 12 months per year and then multiplying it by .1 for the 10% she is expected to pay each month).  If her total monthly payments on federal loans are about $950, then she would be eligible for PAYE and public service forgiveness, but it is a close call.

Consolidate or try for forgiveness?

The key to answering this question is looking at the total spending, which means combining the principal and the interest.  In many cases it is possible to spend more money trying for forgiveness than you would if you just paid it off right away.

To do the math, simply use any loan repayment calculator.  Enter the interest rate, length of the repayment, and total value of the loan.  If you multiply the calculated monthly payment, but the length of the loan, you get the total cost of the loan.  If you subtract the principal balance from the total cost of the loan you get the total interest.

Once you figure out how to do the math, you can make tweaks for different interest rates, repayment lengths and other options. Look at monthly payments, total costs, and think about how they impact your long-term financial goals.  Important considerations would include retirement planning, and whether or not you want to buy a house.

The easy question to answer for Jenny would be whether or not to consolidate her private loans.  Without having the possibility of forgiveness in the future, lowering the interest rate with a private student loan consolidation company is an easy call.  For example, if she was able to consolidate at the market best 2% currently offered by a number of lenders, she could enroll in a 5 year plan, spend $490 per month (instead of the approximately $322 that she currently spends on her private loans) and save over $8,500 in interest over the life of the loan.  Plus, she gets the loan paid off a full 5 years faster.

The hard call is the federal debt.  By our estimations, on the standard plan she will spend about $959 per month and pay about $27,000 in interest (this is using an interest rate of 5.6% for her stated range of 4.5% to 6.8%).

If she goes after forgiveness, she could would spend about $833 per month (based on her income) and pay $100,000 total.  If she wanted to get super aggressive, she could try to knock out the federal loan in 5 years with an 2% interest rate.  That would result in a monthly payment of $1542, but it would get the loan paid off in 5 years AND save approximately $4,500 over the option to chase forgiveness.

For Jenny, the wisdom of this decision comes down to three things: her goals, her future income, and her aversion to risk.  If she wants to buy a house in the next 5 years, the high monthly payment of a 5 year loan could be a mistake as it could significantly limit her buying power.  However, if she wanted to buy a house in the next 5 to 10 years, aggressively paying off the debt would be a really smart move and put her in a great position to buy the home.  As for her future income, if she will be looking a a raise in the very near future, she make quickly reach the point where she is no longer eligible for Income-Driven plans, even on the favorable PAYE or REPAYE, this would limit the value of forgiveness.  However, if losing a job or a reduction of income is a real concern, keeping the loans with the federal government makes a lot of sense.  Finally, if moving to an employer who isn’t a public interest employer is a possibility, chasing public service forgiveness could be out of the picture completely.

The Bottom Line

Jenny’s high income and high student debt make for a pretty close call.  Consolidating the private loans at a lower rate is an easy call, but how she handles the federal loans is a question of much more than just basic math.  Finding the right solution requires running the numbers, but it also requires an honest look and both your career prospects and your financial goals.